A Business Plan: The Key to Success for Raising Private Equity Capital June 25, 2011

A Business Plan:
The Key to Success for Raising Private Equity Capital
June 25, 2011
Gagan Verma
What is a Business Plan?
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Formal written statement of a set of business goals and the plan for reaching those
goals over a certain time period: a Road Map
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A Business Plan includes:
– Background information on the team
– Operational objectives & strategy
– Financial objectives & projections
– Marketing strategy
– Human resources strategy
– Other information
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Essential to complete Business Plan before raising Private Equity capital
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Useful to complete Business Plan even if not raising Private Equity capital
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Business Plan Formats
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“Elevator Pitch”
– 3 minute summary of the Business Plan’s Executive Summary
– Used as teaser to generate interest from potential investors
– Often oral; sometimes written
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Oral Presentation
– Power point presentation and oral narrative
– Initiates discussion and gets potential investors to read the Written Presentation
– Typically 10 to 20 pages; and 30 to 60 minutes long
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Written Presentation
– Detailed, well written and well formatted Word document
– Comprehensive
– Typically 20 to 50 pages
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Operational Plan
– Detailed execution plan describing operational planning information
– Extremely important for start-ups and earlier stage companies
– Also required for companies undergoing transition to new market segments, new
geographies, new products, etc.
– Typically 20 to 50 pages
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What is in a Business Plan?
Business Plan’s composition will vary depending on stage of company & other factors.
Generally includes:
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Executive Summary
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Business Description
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Problem or Need in the market
Solution
Summary Financials
Executive Summary should “close the deal”
History
Employees
Products or Services
Operations
Market & Customers
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Market Size
Market Growth
Go-to-market Strategy
Existing & Prospective Customers
Geographical Focus
Industry Focus
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What is in a Business Plan?
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Competitive Landscape
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Business & Revenue Model
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How will company make money?
How does company generate revenue?
Management Team
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Existing and Potential Customers
Market Share of Competitors
Strengths and Weaknesses of Competitors
Competitive Advantages
Barriers to Entry
Most important factor to PE funds, especially for start-ups and early stage companies
Financial Projections & Funding
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5 Year Projections (Income Statement, Cash flow Statement, Balance Sheet)
How much capital does company require over next 5 years?
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PE Fund Manager’s Perspective:
Why a Business Plan is Important
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PE Fund Manager may have little knowledge about your industry
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PE Fund Manager has no knowledge about your business, whereas:
– Management team works at the business day-in, day-out
– Management team has as many as 30 years experience with the business
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PE Fund Managers are approached by thousands of companies seeking capital
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PE Fund Managers have to quickly screen investment opportunities. Screens
may be based on:
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Size of Investment
Stage of company (start-up, growth, mature, etc)
Industry
Technology Risk
Listed company (vs. private company)
Return-on-capital characteristics
Other
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PE Fund Manager’s Perspective –
Why a Business Plan is Important
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PE Fund Managers have 30 to 45 days to understand a business well enough to
make an investment decision --- which has a 5 year investment horizon.
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Management team’s responsibility to help the PE Fund Manager understand their
business very quickly
– Business Plan ensures that a Management Team can effectively and efficiently
accomplish this goal
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The Key Diligence item for PE Funds is the quality of Management Team.
Writing a Business Plan ensures that the Management Team:
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has clear long term strategy (as opposed to only short term operational plans)
is in agreement on strategy
understands their industry and business
has a clear execution plan
Writing a Business Plan before meeting with a PE Fund will ensure that the
Management Team looks smart
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Case Study: IT Services Company
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IT Services company focused on SAP implementation. Sub-contractor to Prime
Contractors
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Founded by an entrepreneur 10 years ago, who owned 100% of equity
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$50 million revenue; 40% historical sales growth rate
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Focused on large size customer segment
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Go-to-market strategy primarily through 1 Prime Contractor; 70% customer
concentration with this Prime Contractor
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Business run very “efficiently”; lacked historical investment to reach larger scale
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Case Study: IT Services Company
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Entrepreneur wanted to sell portion of his equity stake
– To diversify his personal net worth
– To pursue a higher growth strategy, which was also a higher risk strategy
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Entrepreneur wanted to pursue different market: middle market customers
– Requires different go-to-market strategy
• Directly to mid-market customers instead of through Prime Contractors
– Requires different organizational requirements for
• Sales & Marketing
• Operations
• Management
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Case Study: IT Services Company
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Entrepreneur, with assistance of investment bankers, had already completed 2
types of Business Plans (Oral Presentation and Written Presentation).
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Requested entrepreneur to also complete an Operational Business Plan that
answered questions such as:
Operationally, how will you get from “Point A” to “Point B”
Human Resources:
– Who do you need to hire to pursue this new growth strategy?
– Have you identified the new hires?
– When will you hire them?
– How much will they cost?
– How will responsibilities of existing management team be re-aligned?
Customers:
– What is size of new customer orders?
– Who are potential customers?
– Who is servicing their existing requirements?
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Case Study: IT Services Company
Sales & Marketing:
– How will you market your company to mid market companies?
– How will you get business in the mid market?
Technology:
– Do you have the appropriate technology templates for the mid market?
– Where will you get them?
– How much will they cost?
Acquisitions:
– Will you make acquisitions to pursue the mid market?
– Who are the potential acquisition candidates?
– How much would they cost?
– Benefit of acquiring these companies?
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Summary
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A Business Plan is essential to raise private equity capital
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Must be completed before a company begins fund raising process
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Investing time to develop a clear, articulate, thorough Business Plan is a very
high return-on-time investment
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A good Business Plan will:
– Increase the probability of success of raising PE capital
– Increase the pre-money valuation of your company
– Improve the terms on which PE capital is raised
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